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Stanford University Law School
- Securities Class Action Clearinghouse
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IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
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MARC S. WERNER, on behalf of himself |
and all others similarly situated, | No. 3-96CV1795-P
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Plaintiff, |
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-against- |
| JURY TRIAL DEMANDED
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PRONET INC., JACKIE R. KIMZEY, DAVID |
J. VUCINA, JAN E. GAULDING, LEHMAN |
BROTHERS, and GOLDMAN, SACHS & CO., |
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Defendants. |
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COMPLAINT - CLASS ACTION
Plaintiff Marc S. Werner, by counsel, alleges upon knowledge
with respect to himself, and upon information and belief with
respect to all other matters, as follows:
I. JURISDICTION
1. The claims asserted arise under sections 11, 12(2) and
15 of the Securities Act of 1933 (the "Securities Act"), 15
U.S.C. §§ 77k, 77l and 77o and the rules promulgated thereunder
by the Securities and Exchange Commission ("SEC"), and Article
581-33 of the Texas Securities Act.
2. Jurisdiction is conferred upon this Court by Section 22
of the Securities Act, 15 U.S.C. §77v and 28 U.S.C. §§1331 and
1367(a).
[missing text]
this judicial district. In addition, ProNet Inc.'s ("ProNet" or
the "Company") principal offices are located in this district, at
6340 LBJ Freeway, Dallas, Texas.
4. In connection with the acts alleged herein, the defen-
dants, directly or indirectly, used the means and instrumentali-
ties of interstate commerce, including the United Stated mails.
II. PARTIES
5. Plaintiff Marc S. Werner ("Werner") purchased and sold
shares of ProNet common stock, as follows:
(a) On or about May 30, 1996, plaintiff purchased 5,000
shares of ProNet common stock on the Secondary Equity Offering
(defined herein) pursuant to the Stock Prospectus and
Registration Statement (defined herein) at a price of $25.00 per
share.
(b) On or about June 6, 1996, plaintiff sold 2,000
shares of ProNet common stock at a price of $23.875 per share.
6. Defendant ProNet is a corporation organized under the
laws of the State of Delaware. Defendant ProNet is a provider of
wireless messaging services and securities services. As of March
31, 1996, ProNet had approximately 7,069,328 shares of common
stock outstanding. Its stock trades on the NASDAQ National
Market System, and open, efficient and well-developed market in
which the price of the Company's stock reflects publicly
disseminated information.
7. Defendant Jackie R. Kimzey ("Kimzey") was the founder
of the Company. (Stock Prospectus at 48). At all relevant
2
times, he was the Chairman of the Board of Directors, the Chief
Executive Officer and a Director of ProNet. (Stock Prospectus at
48). For the year ended December 31, 1994, defendant Kimzey
received $299,879 in salary plus additional compensation from
ProNet. (Proxy Statement dated April 25, 1995). As of March 31,
1996, defendant Kimzey owned 150,189 shares of ProNet common
stock, or 2.ll% of its outstanding shares. (Stock Prospectus at
50). In his capacity as an officer and director of ProNet,
defendant Kimzey signed the Company's Registration Statement
dated May 29, 1996, as well as the Company's Form 10-K and Letter
to Shareholders for the year ended December 31, 1995.
8. Defendant David J. Vucina ("Vucina"), at all relevant
times, was the President, Chief Operating Officer and a Director
of ProNet. (Stock Prospectus at 48). As of March 31, 1996,
defendant Vucina owned 47,469 shares of ProNet common stock.
(Stock Prospectus at 50). For the year ended December 31, 1994,
defendant Vucina received $267,476 in salary plus other
compensation from ProNet. (Proxy Statement dated April 25,
1994). In his capacity as an officer and director of ProNet,
defendant Vucina signed the Company's Registration Statement
dated May 29, 1996, as well as the Company's Form 10-K and Letter
to Shareholders for the year ended December 31, 1995.
9. Defendant Jan E. Gaulding ("Gaulding"), at all relevant
times, was the Senior Vice President, Treasurer and Chief
Financial officer of ProNet. (Stock Prospectus at 48). As of
March 31, 1996, defendant Gaulding owned 74,850 shares of ProNet
3
common stock, or 1.05% of its outstanding shares. (Stock
Prospectus at 50). In her capacity as an officer and director of
ProNet, defendant Gaulding signed the Company's Registration
statement dated May 29, 1996, as well as the Company's Form 10-K
for the year ended December 31, 1995 and Form 10-Q for the
quarter ended March 31, 1996.
10. Defendant Lehman Brothers ("Lehman") is a national
brokerage and investment banking firm. Defendant Lehman's
principal place of business is 3 World Financial Center, New
York, New York, and it conducts business in Texas. Defendant
Lehman was a co-lead underwriter of a syndicate of 16
underwriters of the Secondary Equity Offering and the Senior Note
Offering conducted on May 31, 1996. As the underwriter of the
Offerings, Lehman was responsible for the proper performance of
due diligence in accordance with the requirements of the securi-
ties laws.
11. Defendant Goldman, Sachs & Co. ("Goldman") is a
national brokerage and investment banking firm. Defendant
Goldman's principal place of business is 85 Broad Street, New
York, New York and it conducts business in Texas. Defendant
Goldman was a co-lead underwriter of a syndicate of 16
underwriters of the Secondary Equity Offering and Senior Note
Offering. As the underwriter of the Offerings, Lehman was
responsible for the proper performance of due diligence in
accordance with the requirements of the securities laws.
4
12. Defendants Lehman and Goldman are sometimes referred to
as the "Underwriter Defendants." Defendants Kimzey and Vucina are
sometimes referred to as the "Individual Defendants."
13. Each of the defendants is liable as a direct partici-
pant in of the wrongs complained of herein.
14. The Individual Defendants, because of their positions
of control and authority as executive officers, directors and/or
controlling shareholders of ProNet, were able to and did,
directly or indirectly, control the contents of the various
financial reports and statements, reports to shareholders, press
releases of ProNet. As officers, directors and/or controlling
shareholders of ProNet, the Individual Defendants had a duty to
promptly disseminate accurate and truthful information with
respect to ProNet's operations, business practices, and financial
condition and results, or to cause and direct that such
information be disseminated so that the market price of the
Company's stock would be based on truthful and accurate informa-
tion. The Individual Defendants participated in the wrongdoing
complained of herein in order to continue and prolong a distorted
and misleading appearance of ProNet's financial condition,
internal controls, and business prospects, so that they could
protect their executive and/or director positions and the
substantial compensation, benefits and prestige they obtained
thereby.
15. The Underwriter Defendants engaged in the misconduct
described herein in order to reap the enormous commissions and
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fees derived from the Offerings described herein, and to continue
to participate in Offerings by ProNet. In the Secondary Equity
Offering, the underwriting syndicate reaped fees and discounts of
$4,720,000. (Stock Prospectus at 1). In the Senior Note
Offering, the underwriting syndicate received a discount of $3.6
million and concession of up to $300,000. (Senior Note
Prospectus at 2, 74). In addition, defendant Lehman acted as one
of the agents for ProNet in obtaining a credit facility of
$300,000,000 from a syndicate of lenders to provide acquisition
funding, and itself pledged $50 million. (Form S-3, June 6,
1996; Bank Loan Report, June 10, 1996).
III. CLASS ACTION ALLEGATIONS
16. Plaintiff brings this action as a class action pursuant
to Rules 23(a) and (b)(3) of the Federal Rules of Civil
Procedure.
17. Plaintiff seeks relief on behalf of himself and all
other persons who purchased ProNet common stock between May 30,
1996 and June 24, 1996, inclusive (the "Class Period"). Excluded
from the Class are the defendants herein, members of the
immediate family of each of the Individual Defendants, and
affiliates, successors and assigns of the individual and
corporate defendants.
18. Thousands of persons are members of the Class. As a
result, joinder of all class members in a single action is
impracticable.
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19. Plaintiff is typical of the Class, inasmuch as he is a
member of the Class and his claims are typical of the claims of
all class members. Plaintiff will fairly and adequately protect
the interests of the members of the Class. Plaintiff has
retained competent counsel experienced in class action securities
litigation. Plaintiff has no interests that are adverse or
antagonistic to those of the Class. Plaintiff's interests are to
obtain relief for himself and for the Class for the harms arising
out of the violations of law set forth herein.
20. Notice to the claims can be provided to such record
owners via first class mail and or publication using techniques
and a form of notice similar to those customarily used in class
action litigation arising under the federal securities laws.
21. Common questions of law and fact exist in this action,
including, inter alia:
(a) whether defendants violated the federal and state
securities laws, by making materially misleading misstatements
and omissions in the Company's filings with the SEC, as well as
other public filings, press releases and other publicly
disseminated documents during the Class Period;
(b) whether defendants, by their wrongful conduct,
created a fraud on the market for ProNet's common stock, and
caused plaintiff and the Class to suffer damages.
22. The questions of fact and law that are common to the
Class herein predominate over any questions solely affecting
individual members.
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23. A class action is superior to other available methods
for the fair and efficient adjudication of the controversy. It
would be impracticable and undesirable for each of the members of
the Class who has suffered harm to bring separate actions; in
addition, the bringing of such actions would put a substantial
and unnecessary burden on the courts, while a single class action
can determine the rights of all class members with judicial
economy.
IV. SUBSTANTIVE ALLEGATIONS
24. In 1993, having traditionally provided paging services
solely to subscribers in the healthcare industry, ProNet changed
its business focus to concentrate on the broader commercial and
retail markets. (Secondary Equity Offering Prospectus dated May
30, 1996 ("Stock Prospectus") at 3; Form 10-Q for the first
quarter ended March 31, 1996 at 5, 7).
25. Indeed, between March 1, 1994 and March 31, 1996, the
Company completed 25 acquisitions, adding 678,200 subscribers.
(Stock Prospectus at 3; Form 10-Q for the first quarter ended
March 31, 1996 at 5, 7; Business Wire, April 26, 1996).
26. Further, ProNet's revenue had grown exponentially (by
approximately 66.5%) -- from $33.074 million for the year-ended
December 31, 1994 to $66.144 million for the year-ended December
31, 1995. Along with this dramatic revenue growth, ProNet's
common stock price similarly grew from $14.50 on December 30,
1994 to $29.50 on December 29, 1995.
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27. This rapid expansion focused primarily in five
geographic regions service by "SuperCenters" located in
Charlotte, Chicago, Houston, Los Angeles, and New York. In April
1996, the Company announced the achievement of three events which
purportedly "solidified its position as one of the leading
wireless messaging providers in the United States." (Stock
Prospectus at 4).
28. Despite these positive signs of growth, ProNet also had
dramatically increased expenses (including depreciation and
amortization expenses arising from its acquisitions), causing the
Company to report a net loss of $7.619 million for the year-ended
December 31, 1995 as compared with net income of $693,000 for the
year-ended December 31, 1994.
ProNet's Acquisition of Teletouch Communications Inc.
29. First, on or about April 16, 1996, defendants announced
that the Company had entered into an agreement and plan of merger
with Teletouch Communications, Inc. ("Teletouch"), stating that
the acquisition would make ProNet the fourth largest paging
company in the United States. (Business Wire, April 16, 1996;
The Dallas Morning News, April 17, 1996; The New York Times,
April 17, 1996).
30. The acquisition of Teletouch was critical to
strengthening the Company's competitive position in the southern
United States, where Teletouch had 310,720 subscribers. In
addition, this market was purportedly less competitive than
larger metropolitan markets, and would permit ProNet to increase
9
its average revenue per unit. The integration of [illegible text]
also allegedly reduce the Company's costs through economies of
scale, expanded continuous signal and sales coverage, and
increased retail distribution. (Stock Prospectus at 4)
31. The transaction, valued at approximately $181 million,
required ProNet to pay nearly $75 million in common stock, take
on $91,000,000 of debt, and pay cash for almost $15 million of
preferred stock. (Business Wire, April 16,1996; Computergram
International, April 25, 1996; The New York Times, April 17,
1996).
32. Teletouch had the right to terminate the agreement if
the Average Closing Price (for the 20 trading days beginning 22
trading days prior to the scheduled closing of the acquisition)
was less than $20.75 per share. (Stock Prospectus at 51).
ProNet's Acquisition of the Motorola Inc. License
33. On or about April 8, 1996, defendants announced that
ProNet had signed a nonbinding letter of intent with Motorola
Inc. to acquire Motorola's nationwide 931.9125 MHz radio common
carrier license and related equipment. (Communications Today,
April 9, 1996; Land Mobile Radio News, April 12, 1996). On or
about April 24, the Company announced the signing of a definitive
agreement to purchase the license and equipment from Motorola.
(Land Mobile Radio News, April 26, 1996; Communications Today,
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April 25, 1996; Dow Jones News Service, April 24,1996; The Wall
Street Journal, April 24, 1996).
34. The Company indicated that it planned to financed the
transaction through its bank credit line and close in the middle
of 1996. (Dow Jones News Service - Wall Street Journal Stories,
April 24, 1996).
35. The Company needed Motorola's nationwide license in
order
to use an exclusive nationwide frequency as a platform
to expand on a cost-effective basis into attractive
markets within and contiguous to the Company's
SuperCenters, . . . to develop regional and national
distribution alliances with a variety of other
communications service providers, . . . [and to have]
the flexibility to focus on acquisition candidates that
offer distribution enhancements, economies of scale and
market expansion opportunities rather than acquisitions
that would supplement the Company's spectrum resources.
(Stock Prospectus at 4).
ProNet's Acquisition of Pac-West Telecom Inc., Strategic
Products Corp., and Ventures in Paging L.C. and
Georgialina Communication Co.
36. On or about April 30, 1996, the Company announced that
it had signed a definitive agreement to merge with Pac-West
Telecomm Inc. in a deal valued at $19,000,000. At the same time,
the Company reported that it had agreed to acquire the stock of
Strategic Products Corp. (Computergram International, April 30,
1996).
37. On or about May 7, 1996, the Company announced that it
had signed a letter of intent to purchase all of the outstanding
capital stock of Georgialina Communication Co. and affiliates for
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approximately $11.6 million. (Dow Jones News Service, May 7,
1996; Business Wire, May 7, 1996).
38. The Company also announced that it had signed a letter
of intent to purchase substantially all of the assets of Ventures
in Paging L.C. for an approximate purchase price of $6.1 million.
(Dow Jones News Service, May 7, 1996; Business Wire, May 7,
1996).
The May 30-31, 1996 Public Securities Offerings
39. ProNet conducted an offering of 4,000,000 shares of
ProNet common stock at a price of $25.00 per share, yielding
proceeds of $100,000,000 on or about May 30, 1996 ("Secondary
Equity Offering"). (Stock Prospectus at 1). The next day,
ProNet conducted an offering of $120,000,000 worth of 10 7/8%
senior subordinated notes due 2006 ("Senior Note Offering").
(Senior Subordinated Note Offering Prospectus ("Note Prospectus")
dated May 31, 1996 at 1). Through these two Offerings,
defendants raised approximately $220,000,000, before underwriter
commissions and fees.
40. The Company announced that the proceeds of both the
$100 million Secondary Equity Offering and $120 million Senior
Note Offering were to be used to, inter alia:
(i) refinance $88 million of outstanding Teletouch bank
debt and accrued interest anticipated to be outstanding
at the time of the closing of the Teletouch
Acquisition; (ii) to repay $10 million in aggregate
principal amount of Teletouch's 14% senior subordinated
notes due 2003; (iii) to redeem approximately $17
million in liquidation preference of, and accrued and
unpaid dividends on, Teletouch preferred stock; (iv) to
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fund the $43 million cash acquisition of the Nationwide
License [from Motorola]; (v) to pay approximately $9
million to fund the cash portion of the purchase price
of PacWest; (vi) to pay approximately $12 million to
fund the purchase price of Georgialina; (vii) to pay
approximately $6 million to fund the purchase price of
VIP; (viii) to repay approximately $27 million of
borrowings outstanding under the Credit Facility.
(Stock Prospectus at 11).
41. ProNet's dramatic growth strategy required enormous
amounts of capital. Defendants knew that they would have to
conduct huge equity and debt offerings to finance ProNet's
expansion.
42. Many factors threatened defendants' ability to raise
capital, however.
43. ProNet's acquisition strategy negatively impacting its
financial results. While ProNet was profitable from 1991 through
1994, the acquisitions resulted in the issuance of additional
debt and the incurring of significantly greater depreciation,
amortization and interest expenses, which rendered the Company
unprofitable in 1995 and the first quarter of 1996. (Stock
Prospectus at 8). These factors presented substantial obstacles
to raising capital at favorable prices.
44. ProNet's desperate drive for market share also
necessitated that ProNet vastly increase its subscriber base.
Toward this end, ProNet commenced two reseller incentive programs
in November 1995, in which it offered discounts to resellers who
achieved certain sales quotas and agreed to sell exclusively
ProNet's services.
13
45. ProNet's move into the commercial market and the change
in subscriber base also caused a decline in average revenues per
unit, since the Company's subscriber base shifted from leased to
COME pagers, which do not general leasing fees. (Form 10-Q at
9). While the Company anticipated continuing declines,
defendants pointed to the expansion of the reseller operations as
a solution to this problem. (Form 10-Q at 9).
Failure of Reseller Program, Which Threatened Ability to
Raise Capital
46. Nevertheless, the reseller incentive program did not
provide ProNet with the benefits the Company sought. Rather, in
response to the commencement of the reseller incentive program,
ProNet's competitors lowered prices in order to draw resellers
away from the Company. For example, in the Houston Market,
companies such as Paging Network Inc. ("Page Net"), MobileMedia
Corporation ("MobileMedia"), and MobileComm began to decrease
prices, and thereby attracted resellers who purportedly were
signed to exclusive contracts with ProNet.
47. Armed with offers of better prices from ProNet's
competitors, resellers insisted that the Company lower its
prices. This "reseller revolt" put pressure on the Company to
decrease its prices.
48. As a result, the Company suffered decreased cash flow,
revenues, and profits.
49. Had defendants even hinted at the negative impact of
the reseller program on ProNet's operations and financial
14
results, the Offerings and pending acquisitions would have had
little chance of being completed, especially at the prices
contemplated.
50. As a result, defendants began a campaign aimed at
artificially inflating the market price of ProNet's securities.
Hype of Purportedly Foolproof Reseller Programs and
Motorola Technology to Expand Subscriber Base in 1995
Annual Report
51. In the Letter to Shareholders contained in ProNet's
Annual Report for the year ended December 31, 1995, defendants
Kimzey and Vucina characterized 1995 as the Company's "best year
in ProNet's 14-year history." (Letter to Shareholders at 1).
52. Defendants emphasized the advantages of the acquisition
of Teletouch and the nationwide license from Motorola:
Late Breaking News. We recently announced the signing
of a definitive agreement with Motorola Inc. for the
transfer of Motorola's nationwide license and
associated system equipment. This nationwide frequency
will be used to further strengthen our regional
presence, expand into new markets and provide a system
to support strategic marketing alliances. In addition,
we announced a definitive merger agreement with
Teletouch Communication, Inc. The combined entity
will serve more than 1.4 million subscribers and form
contiguous coverage in the Southern U.S. reaching from
Texas to Florida. The merger with Teletouch and the
acquisition of the nationwide license demonstrates
ProNet's strength as a major presence in the industry.
We expect both transactions to close later in 1996.
(Annual Report at 3).
53. Furthermore, defendants stressed that the reseller
incentive programs would both improve margins and enable the
Company to maintain large numbers of subscribers:
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As marketeers, we are surpassing the inefficiencies and
low margins built into the industry's traditional
distribution systems by attracting and keeping top
resellers. We have initiated two innovative programs
that will build strong partnerships, set performance
goals, improve support and provide resellers
substantial rewards for success as resellers add and
keep large numbers of subscribers. In addition we are
rethinking the direct marketing of paging services by
refocusing on medical and commercial paging
applications and by taking a new approach to retailing.
As visionaries, we are forming strategic alliances with
other providers of paging and special services to make
these available to our subscribers as customer demand
and return on investment warrant.
(Letter to Shareholders at 3) (italics in original) (underscoring
added).
54. In the Annual Report, defendants assured investors
ProNet's retailer incentive program rendered "obsolete"
competition for resellers and consequent "demands" by resellers
for concessions:
Redefining Reseller Channels of Distribution with Two
Innovative Incentive Programs. A good paging reseller
is worth its weight in gold - or maybe more. ProNet
certainly believes this and is rolling out two
pioneering distribution incentive programs to stimulate
our resellers to outperform themselves.
Paging resellers are businesses that buy blocks of
airtime at wholesale prices from paging companies like
ProNet and sell the service to subscribers. Paging
providers like the system because resellers bear the
cost of acquiring subscribers (either directly or
through retail channels) as well as bill, collect and
service the pagers. For our part, we provide reliable,
high-quality paging transmissions at a competitive cost
to the end user. (Some 57% of our pagers in service
are held by the resellers, while direct sales and retail
distribution make up the remaining 43%.)
On the negative side, many resellers offer their
customers steep discounts and therefore demand the same
and other concessions from paging providers. Special
packages offered by competing service providers
encourage resellers to shift business towards the
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company with the "special of the month" which can make
growth of provides very unpredictable. ProNet's new
strategy renders these traditional relationships
obsolete with contractual incentive programs that allow
both parties to win.
One new incentive program, Pinnacle, is designed
for the 20 largest and best among our existing and
prospective resellers. In the for of a purchasing
agreement and performance contract, Pinnacle requires
resellers to add 1,200 units a month for a 36 month
period and retain the units added for a period of 24
months thereafter. If they achieve this goal they get
preferential pricing and select 24 hour personal
support. At the end of the required 60 months, in
recognition of their part in helping ProNet grow, they
become ProNet shareholders! This program gives our
larger resellers the opportunity to build personal
wealth through ownership in ProNet and puts our
interests and theirs on the same tack, pulling in the
same direction.
Our other new program, Preferred, is designed for
smaller resellers. Signing up renewing one-year
contracts for different levels, of commitment (250, 500
or 750 pagers) gives the reseller pages a more
competitive price, airline miles, Alliance Channeling)
channeling smaller resellers through the preferred
partner) and , ever December, no bill if they renew for
the next year.
(Annual Report at 9-10) (italics in original) (underscoring
added).
55. The Annual Report continued to hype the reseller
"partners":
WE WANT PRONET RESELLERS TO BE OUR PARTNERS. With more
than half of our pagers in service through resellers,
we are enhancing these relationships with two exciting
new incentive programs. Pinnacle challenges our
largest resellers to add 1,200 units a month.
(Achieving this goal yields preferential pricing and
other perks.) Maintain this performance over 60
months, and they will become ProNet shareholders. The
Preferred program commits participants to on-year
contracts for different levels of unit sales. The
rewards: pagers at a more competitive price, airline
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miles, Alliance Channeling (channeling smaller
resellers through Preferred partners) and every
December, no bill if they renew for the next year.
(Annual Report at 10)
56. In the Letter to Shareholders, defendants also touted
the acquisition of new technology to support an expanded
subscriber base:
As managers, we are expanding into five new markets
areas where ProNet previously had no commercial
spectrum or was represented solely by our medical
paging services. These markets include Philadelphia,
San Diego, Tampa, Orlando and Miami/Fort Lauderdale.
WE are converting all major ProNet networks to
Motorola's FLEX, an advanced one-way protocol that
dramatically increase paging transmission speed, thus
allowing us to support a larger subscriber base.
(Letter to Shareholders at 3) (emphasis in original).
57. Likewise, the Annual Report forecasted conversion to
this technology, which would permit a larger subscriber based, by
1997:
FLEX Protocols Benefit ProNet with Increased Capacity.
Another initiative in the new phase of our growth
strategy is converting ProNet's major paging networks
to Motorola's FLEX one-way paging protocols. FLEX more
than doubles the paging signal transmission rates of
standard protocols which results in greater capacity on
the system. This allows us to load more subscribers on
the system without sacrificing our quality of paging
service. FLEX an be employed simultaneously with the
older protocols, thus allowing us to make the
conversions without sacrificing services or
inconveniencing resellers and subscribers. All our
major networks will be converted to FLEX by the end of
1997.
(Annual Report at 8-9).
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Misleading Statements and Nondisclosures in $100,000,000
Offering Documents
58. Its stock price having been hyped, on May 30-31, 1996,
ProNet successfully completed both the Secondary Equity Offering
and Senior Note Offering, raising approximately $220,000,000
before underwriter commissions and fees. (Stock Prospectus at 1;
Note Prospectus at 1).
59. The Prospectus and Registration Statement incorporated
by reference numerous of ProNet's filings with the SEC,
including the 1995 Annual Report and Form 10-K, and the Form 10-Q
for the first quarter ended March 31, 1996. (Stock Prospectus at
62).
60. The Prospectus and Registration Statement governing the
Secondary Equity Offering touted the Company's reseller program,
describing it as a successful and a key component of ProNet's
growth strategy. The Offering documents gave no hint that ProNet
was suffering pricing pressures from increased competition in its
reseller program, that competitors had consequently lowered
prices in December 1995, or that resellers had demanded lower
prices in response to competitors' offers.
61. The Stock Prospectus and Registration Statement touted
the reseller program as a key component of the Company's growth
and acquisition strategy, without disclosing any problems with
the Company's three phase development plan:
The Company's strategy seeks to capitalize on the
critical mass of subscribers, broad spectrum resources,
distribution capabilities and marketing expertise that
the Company has built since the initiation of its
three-phase growth plan in 1993. The objective of the
19
Company's strategy is to enhance the Company's position
as a leading provider of wireless messaging services
and to accelerate the Company's growth on subscribers
and cash flow. Key elements of the Company's strategy
include . . . (iv) increasing penetration of selected
distribution channels, primarily reseller and retail,
through the development of innovative marketing
programs.
(Stock Prospectus at 4).
62. Even though the reseller program impaired ProNet's cash
flow (as admitted a mere three weeks later, as discussed below),
the Stock Prospectus and Registration Statement emphasized the
cash flow benefits associated with using resellers to distribute
pagers:
RESELLERS. In addition to offering paging
services directly to end users, the Company also
provides commercial paging services indirectly through
marketing agreements with resellers. The use of this
channel allows the Company to broaden its distribution
reach as rustlers generally market to segments of the
population that could not be cost efficiently targeted
by the Company's direct sales force or retail channels.
(E.G., [sic] certain small businesses, ethnic groups or
individual consumers). Typically, the Company offers
these resellers paging services in bulk quantities at
wholesale monthly rates that are lower than the
Company's regular rates through its direct sales
channel. The Company's costs of handling and billing
such reseller accounts are generally lower on a per
pacer basis than the costs of handling and billing its
other accounts. As a result, this sales channel
generates attractive incremental cash flow an enables
the Company to increase operating efficiencies and to
lower per unit cost by amortizing its network
infrastructure investment over a larger subscriber
base. In addition, because reseller bear the economic
burden of pacer capital investment, direct selling
expense and certain administrative costs, management
believes that the resulting cash flow stream from
pagers serviced through resellers represents an
attractive return on the Company's total capital
investment. Reseller units represent approximately 51%
20
of the Company's subscribers on a pro forma basis at
March 31,1996.
(Stock Prospectus at 31) (emphasis added).
63. In addition, the Stock Prospectus and Registration
falsely portrayed the success of the two reseller incentive
"partner" programs, which resulted in "exclusive" "one-year" and
"five-year" contracts with resellers and "generate predictable
cash flows":
RESELLER PROGRAMS AND ALLIANCES. The Company
recently unveiled two innovative new programs aimed at
creating close ties with its resellers, maximizing
penetration and minimizing churn in the reseller
channel. The "Pinnacle Partner" program targets the
country's largest resellers who can generate at least
1,200 net subscriber additional per month and the
"Preferred Program" is aimed at smaller resellers
generating up to 750 net subscriber additional per
month. The purpose of these programs is to capitalize
on the Company's traditional strength in the reseller
channel by entering into one-year and five-year
distribution contracts with reseller that encourage the
resellers to use ProNet exclusively through
preferential pricing, administrative and systems
support and, for resellers in the Pinnacle Partner
program, participation in the Company's equity. These
programs are intended to commit resellers to ProNet,
accelerate subscriber growth, create distribution
alliances for all products and services and generate
predictable cash flows.
(Stock Prospectus at 31).
64. Continuing to tout the success of the third phase of
ProNet's growth strategy, the Stock Prospectus and Registration
Statement characterized the reseller incentive program as
"effective and profitable", providing "guaranteed" revenues:
Phase III, initiated in the fourth quarter of
1995, seeks to capitalize on the critical mass of
subscribers and the spectrum, distribution resources
and marketing expertise that the Company has built to
date. Management believes that the execution of Phase
21
III will solidify the Company's position as a leading
provider of wireless messaging services and will result
in an accelerated growth in subscribers and cash flow.
Key elements of the Company's strategy are outlined
below . . .
INCREASED PENETRATION OF SELECTED DISTRIBUTION
CHANNELS. ProNet utilizes a variety of distribution
channels including resellers, a direct sales force and
company-operated retail stores. . . . The Company
focuses on developing innovative marketing programs in
what management believes are the most effective and
profitable distribution channels. Recent initiatives
have placed particular emphasis on rapidly growing
consumer segment of the market. Developments have
included . . . the initiation of the highly innovative
"Partners Program" designed to promote exclusivity and
guaranteed sales levels in the reseller channel.
(Stock Prospectus at 39).
65. Although resellers had already begun to demand lower
prices in response to competitors offers, negatively impacting
the Company's cash flow and profitability (as admitted a mere
three weeks later, as discussed below), the Stock Prospectus and
Registration Statement falsely implied that it should break even
unless the possible need to provide discounts arose:
Product sales and costs are also likely to
increase as the business mix shifts in favor of COME
units. The company's objective is to break even on
product sales, but it may selectively offer discounts
due to promotional offers or competitive pressures.
(Stock Prospectus at 25).
66. Additionally, the Stock Prospectus and Registration
Statement falsely described the availability of supplies, and did
not disclose any existing problems in obtaining necessary
inventories (which, as discussed below, were revealed a mere
three weeks after the Offerings):
22
The Company buys pagers primarily from Motorola. . . .
To date, the Company has not experienced significant
delays in obtaining pagers, terminals or transmitters.
. . . [T]he Company believes that sufficient
alternative sources of pagers, terminals and
transmitters exist.
(Stock Prospectus at 10) (emphasis added).
67. ProNet's Stock Prospectus and Registration Statement
failed to disclose the following material facts, inter alia:
(a) they failed to correct the statements in the 1995
Annual Report that ProNet's reseller incentive programs had
rendered "obsolete" competition for resellers and consequent
"demands" by resellers for concessions;
(b) they omitted to state that competitors such as
PageNet, MobileMedia and MobileComm had lowered their prices in
December 1995 to vie for ProNet's reseller customers;
(c) they omitted to state that ProNet had to reduce
prices to resellers to maintain their business;
(d) they omitted to state that notwithstanding the
lowering of prices, ProNet still lost reseller customers to
competitors;
(e) they omitted to state that ProNet's cash flow,
revenues and profitability had been impacted by responses of
competitors to the Company's reseller incentive program, and the
response of resellers to competitors' offers;
(f) they failed to correct the statements in the Annual
Report that conversion to Motorola's FLEX technology would be
completed by the end of 1997 and would yield an increased
subscriber base.
23
68. These omitted material facts rendered the Stock
Prospectus and Registration Statement false and misleading
because, by May 30, 1996, defendants knew and/or recklessly
disregarded that:
(a) the Company's competitors had in fact lowered
prices and in response, resellers had demanded concessions from
ProNet;
(b) the Company's cash flow, sales and profitability
had been negatively impacted by the need to make concessions to
resellers;
(c) ProNet's ability to complete contemplated
acquisitions was hindered;
(d) ProNet's ability to attain market share and
continued expansion was impaired and unlikely;
(e) ProNet's ability to convert to Motorola's FLEX
technology and consequent increase in subscriber capacity was
impeded by the unavailability of the technology.
69. The affirmative statements in ProNet's Stock Prospectus
and Registration Statement were materially false and misleading
in the following manner:
(a) the statements in paragraphs 61 and 62 indicated
that use of reseller distribution channels and reseller incentive
programs generated a positive cash flow, when, in fact, they
impaired cash flow;
(b) the statement in paragraph 62 indicated that use of
reseller distribution channels and reseller incentive programs
24
increased the Company's subscriber base, when, in fact, they
caused the Company to lose reseller customers and thereby
decreased the subscriber base;
(c) the statement in paragraph 63 indicated that
contracts with resellers were "exclusive" and had "one-year" or
"five-year" terms and would "generate predictable cash flows",
when, in fact, resellers had demanded concessions from ProNet,
fled to competitors, and caused decreased cash flows;
(d) the statement in paragraph 64 indicated that the
reseller incentive programs were "effective and profitable",
providing "guaranteed" revenues, when in fact, resellers had
demanded concessions from ProNet, fled to competitors, and caused
decreased cash flows and revenues;
(e) the statement in paragraph 65 indicated that the
Company should break even unless the possible need to provide
discounts arose, when, in fact, the demand for concessions had
already occurred and negatively impacted profitability;
(f) the statements in paragraphs 66 and 67, contained
in the Annual Report and incorporated by reference in the
Prospectus and Registration Statement, indicated that the
reseller incentive programs had rendered reseller "demands" for
"concessions" and competitive pressure "obsolete," when, in fact,
competitors had lowered prices in successful attempts to draw
reseller customers from ProNet, and consequently, resellers had
demanded price concessions from ProNet.
25
Post-Offering Statements
70. Defendants continued to conceal the competitive
pressures on the reseller business or problems with Motorola, and
instead continued to assure the market that expansion would
continue.
71. On or about June 17, 1996, defendant Gaulding touted
the amendment of a credit facility as providing:
additional resources to continue our growth strategy. .
. . The increased credit facility, coupled with our
recently completed debt and equity offerings, position
us well financially for additional growth and
expansion.
(Business Wire, June 17, 1996).
Disclosure of Falsity of Prospectus and Registration
Statement
72. In a stunning turnaround only three weeks later,
defendants for the first time revealed that defendants disclosed
in response to competitors' prices, resellers had defected from
ProNet, or demanded lower prices to remain with the Company.
This resulted in decreased cash flow and earnings for the
Company.
73. On or about June 21, 1996, defendants announced that
ProNet's second quarter 1996 earnings before other income
(expense) taxes, depreciation and amortization (EBITDA) were
expected to be in the range of $5.3 million to $5.7 million,
lower than the $6.2 million EBITDA for the first quarter of 1996.
Net revenues were expected to be flat compared with the first
quarter. (Business Wire, June 21, 1996).
26
74. In sharp contrast to statements made only three weeks
earlier in the Stock Prospectus and Registration Statement,
defendant Kimzey disclosed:
The unanticipated competitive response to our partners
program with our resellers has been dramatic in the
marketplace, particularly as the implementation of the
program has accelerated over the last several weeks.
This competitive pricing pressure downward had resulted
in the decrease in the Company's EBITDA and lack of net
revenue growth in the short term. As a result, EBITDA
for the remaining quarters of 1996 is expected to be
flat or slightly down as compared to anticipated
second-quarter results, before including the financial
results of the nation-wide license acquisition and the
Company's four pending acquisitions expected to close
in September and October 1996.
(Business Wire, June 21, 1996).
75. Defendant Gaulding explained that the company had made
agreements with paging-service resellers to offer ProNet services
at discounted prices and other incentives. In exchange, the
resellers made long-term commitments with ProNet. However, some
resellers already had a substantial number of paging customers
who signed up with ProNet at the old price, but wished to obtain
the discounted price for those customers. This resulted in
decreased revenue to the Company. (The Dallas Morning News, June
22, 1996).
76. Similarly inconsistent with statements made in the
Offering documents, defendants also attributed the Company's
financial problems on the acquisition of a paging license and
equipment from Motorola. (The Wall Street Journal, June 24,
1996).
27
77. The business next day, analysts revealed that ProNet
expected resellers to sign exclusive agreements under the two
incentive programs without asking for lower prices. However,
resellers threatened to turn to ProNet's competitors unless they
received lower prices than were offered by ProNet and their
existing customers were switched to ProNet at the lower price.
(Dow Jones News Service, June 25, 1996).
78. Defendants' astonishing announcement caused the market
price of ProNet's common stock to plummet from the offering price
of $25.00 per share on May 30, 1996 to close at $11.50 per share
on Friday, June 21, 1996 on volume of 3,520,200 shares, and fell
further to close at $11.325 on Monday, June 24, 1996 on volume of
1,653,500 shares
FIRST CLAIM FOR RELIEF
(For Violations of Section 11 of
the Securities Act)
79. Plaintiff repeats and realleges paragraphs 1-78 as if
fully set forth herein.
80. Defendants issued, caused to be issued, participated in
the issuance of, and/or signed the Registration Statements and
Prospectuses described herein.
81. At the time the Offerings became effective, the Regis-
tration Statements and Prospectuses contained false and mislead-
ing statements of material facts and omitted facts necessary in
order to make the statements made, in light of the circumstances
under which they were made, not misleading, as set forth above,
in violation of Section 11 of the Securities Act.
28
82. As a result of said violation of Section 11 of the
Securities Act, plaintiff and the members of the Class have
suffered substantial damages, for which the defendant is liable.
83. As required by Section 13 of the Securities Act, this
cause of action is being brought within one year of plaintiff's
discovery of the false and misleading statements and material
omissions alleged herein, or after such discovery should have
been made by the exercise of reasonable diligence, and within
three years after the shares of ProNet's securities were bona
fide offered to the public.
SECOND CLAIM FOR RELIEF
(For Violations of Section 12(2)
of the Securities Act)
84. Plaintiff repeats and realleges paragraphs 1-83 as if
fully set forth herein.
85. The defendants herein were statutory sellers of
ProNet's securities. Furthermore, they were substantial,
necessary participants and substantial factors in the sale of
ProNet securities to the investing public and they conspired with
one another in connection with the preparation of the false and
misleading Registration Statements and Prospectuses used in
conjunction with the sale of ProNet's securities.
86. Each of the defendants owed to the Purchasers of ProNet
securities, including plaintiff and the members of the Class, the
duty to make a reasonable and diligent investigation of the
statements contained in the Registration Statements and Prospec-
tuses to ensure that said statements were true and that there was
29
no omission of material facts necessary to be stated in order to
make the statements contained therein not misleading. These
defendants knew, or in the exercise of reasonable care should
have known, of the misstatements and omissions of material facts
contained in the Registration Statements and Prospectuses and set
forth above. As such, each of the defendants is liable to
plaintiff and the members of the Class.
87. None of the false and misleading statements and omis-
sions contained in the Registration Statements and Prospectuses,
as alleged herein, were known to plaintiff and the members of the
Class at the time they purchased shares of ProNet securities, and
in the exercise of reasonable care could not have been known by
them.
88. The defendants offered and sold ProNet securities by
the use of means of instruments of transportation or communi-
cation in interstate commerce or the United States mails, by
means of a prospectus or oral communication, which included the
untrue statements or omissions of material facts as particular-
ized above. Said securities could not and would not have been
marketed to the investing public but for the false and misleading
Representations and Statements.
89. By reason of the conduct alleged herein, the defendants
actively participated in the sale of securities to plaintiff and
the members of the Class and violated Section 12(2) of the
Securities Act. As a direct and proximate cause of these
30
defendants' wrongful conduct in selling securities of ProNet,
plaintiff and the Class have suffered injuries.
THIRD CLAIM FOR RELIEF
(For Violations of Section 15
of the Securities Act)
90. Plaintiff repeats and realleges paragraphs 1-89 as if
fully set forth herein.
91. Defendants, by reason of their duty to ProNet and the
investing public, and their control of ProNet and its statements,
and by reason of their acts as described herein, controlled
ProNet within the meaning of Section 15 of the Securities Act.
92. Defendants thus violated Section 15 of the Securities
Act and are liable for the acts of ProNet which caused damages to
plaintiff and the Class.
FOURTH CLAIM FOR RELIEF
(For Violation of the Texas Securities Act)
93. Plaintiff repeats and realleges the allegations of
paragraphs 1 - 92 above as if fully set forth herein.
94. The misrepresentations and omissions referred to above
constitute violations of sections 33 of the Securities Act of
Texas, V.A.T.S., art. 581-33 (the "Texas Securities Act"), which
provides in part as follows:
A. Liability of Sellers
. . . . (2) Untruth of omissions. A
person who offers or sells a security . . .
by means of an untrue statement of a material
fact or an omission to state a material fact
necessary in order to make the statements
made, in the light of the circumstances under
which they are made, not misleading, is
31
liable to the person buying the security from
him, who may sue either at law or in equity
for rescission, or for damages if the buyer
no longer owns the security. . . .
(i) By virtue of conduct as described above, and art.
581-33(D)(1) of the Texas Securities Act, defendants are
primarily liable to plaintiff and the Class for rescission, for
which plaintiff and the Class hereby sue. Furthermore, pursuant
to art. 581-33(D)(6) and (7) of the same Act, plaintiff and the
Class may also recover their reasonable attorneys' fees and
costs, for which plaintiff and the Class hereby sue.
FIFTH CLAIM FOR RELIEF
(Control person and Aider Liability
Under the Texas Securities Act)
95. Plaintiff repeats and realleges the allegations of
paragraphs 1 - 94 above as if fully set forth herein.
a. Section 581-33(F)(1) and (2) of the Texas
Securities Act provides as follows:
F. Liability of Control Persons and Aiders.
(1) A person who directly or indirectly
controls a seller, buyer, or issuer of a
security is liable under section 33A, 33B or
33C jointly and severally with the seller,
buyer, or issuer, and to the same extent as
if he were the seller, buyer, or issuer,
unless the controlling person sustains the
burden of proof that he did not know, and in
the exercise of reasonable care could not
have known, of the existence of the facts by
reason of which the liability is alleged to
exist.
(2) A person who directly or indirectly
with intent to deceive or defraud or with
reckless disregard for the truth or the law
materially aids a seller, buyer, or issuer of
a security is liable under Section 33A, 33B,
32
or 33C jointly and severally with the seller,
buyer, or issuer and to the same extent as if
he were the seller, buyer, or issuer.
96. Defendants committed a primary violation of the Texas
Securities Act for the reasons set forth above.
97. Plaintiff and the Class allege that the defendants are
controlling persons and aiders within the meaning of the
foregoing statute and, therefore, that they are liable for
ProNet's violation of art. 581-33 as described above. Therefore,
defendants are liable to plaintiff and the Class for rescission,
attorneys' fees and costs, for which plaintiff and the Class now
sue.
WHEREFORE, plaintiff, on his own behalf and on behalf of the
Class, prays for judgement as follows:
A. Declaring plaintiff to be a proper class representative
and this action to be a proper class action;
B. Awarding plaintiff and all other members of the Class
damages against all defendants jointly and severally in an amount
which may be proven at trial, together with prejudgement interest
thereon;
C. Awarding plaintiff legal fees and expert fees, together
with interest, cost and disbursements; and
D. For such other relief as to this Court appears just and
proper.
33
Dated: June 27, 1996
KILGORE & KILGORE
/s/
By: _________________________
Roger F. Claxton
State Bar No. 04329000
Robert J. Hill
State Bar No. 09652100
700 McKinley Place
313 McKinley Avenue - LB-103
Dallas, Texas 75204-2471
(214) 969-9099
Attorneys for Plaintiffs
OF COUNSEL:
SCHOENGOLD & SPORN, P.C.
Samuel P. Sporn, Esq.
Joel P. Laitman, Esq.
233 Broadway
New York, New York 10279
(212) 964-0046
34
CERTIFICATION
STATE OF NEW YORK )
)ss:
COUNTY OF NEW YORK )
I, Marc S. Werner being duly sworn according to law,
hereby state:
1. I have reviewed the complaint and authorized its
filing.
2. I did not purchase ProNet stock at the direction of
plaintiff's counsel or in order to participate in any private
action arising under the Securities Act or the Securities
Exchange Act.
3. I am willing to serve as a representative party on
behalf of a class, including providing testimony at deposition
and trial, if necessary.
4. During the Class Period specified in the Complaint, I
made the following transactions in ProNet securities:
(a) On or about May 30, 1996, plaintiff purchased
5,000 shares of ProNet common stock on the Secondary Equity
Offering pursuant to the Stock Prospectus and Registration
Statement at a price of $25.00 per share.
(b) On or about June 6, 1996, plaintiff sold 2,000
shares of ProNet common stock at a price of $23.875 per share.
5. During the three years preceding today, I have never
served as a representative party on behalf of any class of
shareholders.
35
6. I will not accept any payment for serving as a repre-
sentative party on behalf of a class beyond my pro rata share of
any recovery, except as ordered or approved by the Court in
accordance with the Securities Act and the Securities Exchange
Act.
/s/
________________________
MARC S. WERNER
Sworn to and subscribed
before me on this 26th
day of June, 1996
/s/
Notary Public, State of New York
3 Aug 1997